What is a Credit Score?

A credit score is a vital financial indicator that helps lenders assess your ability to repay borrowed funds. When applying for a loan, credit card, or mortgage, your credit score plays a key role in determining your eligibility. It reflects your past borrowing behaviour and overall creditworthiness. 

This highlights the importance of a credit score in helping lenders assess your creditworthiness and decide the terms of approval.

A credit score is a three-digit number ranging from 300 to 900, assigned by credit bureaus based on your credit history. The higher the score, the greater your chances of obtaining loans and credit cards on favourable terms.

This score is calculated by analysing various factors, including:

• Repayment history

• Outstanding debts

• Credit tenure

• Recent credit enquiries

• Credit utilisation ratio

• Types of credit accounts held

• Frequency of credit applications

• Missed or late payments on previous loans

Credit scoring in India began in the early 2000s with the establishment of TransUnion CIBIL, the country’s first credit bureau. Before this, lenders relied on personal judgment and collateral to assess credit risk. The introduction of credit scores standardized the evaluation process by using individuals’ borrowing and repayment histories to measure creditworthiness.

As consumer credit grew, other bureaus like Experian, Equifax, and CRIF High Mark entered the market, regulated by the Reserve Bank of India. Today, credit scores ranging from 300 to 900 are vital for loan approvals and interest rates. This system has improved transparency in lending, helping borrowers access credit more easily while enabling lenders to manage risk effectively.

Generally, a lack of credit history results in a score of –1, while a credit history of less than six months yields a score of 0. Each bureau also provides a detailed credit report, which forms the basis for the credit score calculation.

Your credit score reflects your financial discipline and significantly influences your eligibility for a loan. Different CIBIL score ranges affect your chances of loan approval as outlined below:

Credit scores in India are calculated by RBI-approved Credit Information Companies such as:

• TransUnion CIBIL

• CRIF High Mark

• Experian

• Equifax

Banks and financial institutions report credit-related transactions regularly to these bureaus, as mandated by the RBI.

When a lender requests a credit report, the bureau compiles financial data from multiple sources to generate it. This report contains the individual’s credit score, which reflects their repayment history, credit behaviour, and overall creditworthiness.

In India, several RBI-approved credit bureaus provide credit scores based on your credit history and financial behaviour. The scoring range is similar across bureaus, but each follows its own model for evaluation. The types of credit scores are:

• CIBIL Score (300 to 900)

CIBIL is the most popular credit bureau in India. A score of 750 and above is considered ideal. The score is calculated based on credit card usage, loan repayment history, and other financial behaviour.

• CRIF High Mark Score (300 to 900)

CRIF High Mark is another credit bureau in India. It calculates credit scores based on credit activity and outstanding balances. Scores exceeding 750 are viewed favourably by lenders.

• Equifax Score (300 to 850)

Equifax is another credit bureau in India that offers credit scores. A score of 750 or higher indicates ideal creditworthiness.

• Experian Score (300 to 900)

Experian is a well-known credit bureau that provides credit scores. The score ranges between 300 and 900. Scores above 750 are considered excellent.

Credit score plays a crucial role in determining your financial credibility. It directly affects your access to credit and the terms offered by lenders. Here is how:

• Loan Approval

A high credit score increases your chances of getting loans approved. Lenders, thus, view you as a low-risk borrower.

• Better Interest Rates

Individuals with good credit scores often receive loans at lower interest rates. This makes borrowing more affordable over time.

• Higher Credit Limits

A strong credit score can help you secure higher credit card or loan limits. It shows lenders that you can manage larger credit amounts responsibly.

• Faster Approvals

Banks may process your loan or credit application faster when you have a reliable credit profile. This helps you access funds without unnecessary delays.

• Negotiating Power

A good credit score gives you leverage to negotiate better loan terms. You can request lower interest rates or reduced processing fees.

Your credit score is influenced by various financial behaviours. Both positive and negative actions can significantly impact your score over time.

• Delayed credit card payments

• Missed loan EMIs or credit card bills

• Account charged off for non-payment of dues

• Account sent to collections for unpaid bills

• Maxed-out credit card limits

• Closing a credit card with an outstanding balance

• Closing old credit cards

• Holding multiple credit cards simultaneously

• Not checking credit reports regularly

• Applying for multiple loans within a short period

Several financial actions or personal situations do not impact your credit score. These factors have no direct effect on your CIBIL rating:

• Investments and savings account balances

• Bounced cheques unrelated to EMIs or loans

• Inactive or multiple savings accounts

• Debit card transactions

• Checking your own credit score online

• Utility bill payments, such as electricity or phone

• Demographic changes like address or marital status

Checking your CIBIL score is quick and simple. You can complete the process online through credit bureaus or their authorised partners.

1. Click on the ‘Get Your Score’ button in banner.

2. Fill in your personal details such as your full name, date of birth, mobile number, email ID, PAN information, and residential postal code.

3. Choose your employment category from the list provided.

4. Accept the terms and conditions by ticking the respective box.

5. Press the ‘GET REPORT’ button to proceed.

6. Enter the one-time password (OTP) sent to your registered mobile number and click ‘SUBMIT’.

7. After your information is verified, your CIBIL score will be shown on the screen.

Having a good credit score offers multiple advantages. It makes borrowing easier and more affordable. Here are some of the benefits:

• Better Chance of Approval for Credit Cards and Loans

Lenders consider you a low-risk borrower. This increases your chances of obtaining credit card or loan approvals.

• Lower Interest Rates

A high credit score helps you secure loans and credit cards at reduced interest rates. This makes borrowing more cost-effective over time.

• More Negotiating Power

A strong credit score gives you the ability to negotiate better loan terms. You can also request lower interest rates and reduced processing fees.

• Higher Borrowing Limits

Lenders are willing to approve higher loan amounts when your credit score is good. They may also increase your credit card limits.

• Better Car Insurance Rates

Some insurers offer lower premiums to individuals with good credit scores. This reflects their lower financial risk.

A low credit score leads to several negative consequences. These often go beyond the risk of loan rejection.

• Limited Access to Credit Facilities

Lenders view low credit scores as a sign of high risk. This makes it difficult to obtain loans or credit cards.

• Higher Interest Rates and Shorter Tenures

Loans come with higher interest rates when credit scores are low. Repayment periods also tend to be shorter.

• Difficulty in Renting Accommodation

Landlords may deny rental applications due to low credit scores. Some may demand higher security deposits as a precaution.

• Strained Personal Relationships

A poor credit score creates stress in shared financial matters. It can damage trust and affect future financial planning with family members.

If your credit score is low, taking the right steps can gradually improve it and restore your credit health.

• Check your credit report regularly to identify and correct any errors affecting your score

• Settle all outstanding bills on time and enable auto-debit to avoid missed payments

• Keep credit utilisation below 40% of your available limit to maintain a healthy profile

• Avoid closing old credit accounts, as they contribute to a longer credit history

• Plan your finances carefully to prevent overuse of credit and missed repayments

If you are new to credit, building a strong credit score takes time and consistent effort. Here are some effective ways to get started:

• Start with a secured credit card or small personal loan to begin your credit journey

• Keep credit utilisation below 30% to show responsible borrowing

• Pay all credit card bills and loan EMIs on time to build a positive history

• Monitor your credit report regularly to identify and correct errors

• Request a credit limit increase after consistent, timely payments

• Maintain a healthy mix of credit types, such as loans and credit cards

Here are the key differences between a credit score and a credit report:

Both personal and company credit scores assess creditworthiness but serve different purposes. Here is a comparison: